Owning and operating your own small business can be extremely satisfying. Many small business owners are living the dream of turning their passion into their work and are able to go to the office each day doing what they love and something they have an interest in. Owning a small business comes with many perks such as setting your own schedule, being your own boss, and being in charge of your own income potential. As rewarding as it can be, owning a business also comes with many challenges. Overcoming challenges could require an injection of funds quickly. Small business owners tend to choose a commercial loan as they calculate their payments and what will work best for them.
What is a Commercial Loan?
A commercial loan differs from an individual loan in that the loan is distributed to a business rather than to a person individually. The business will then use this lump sum of cash for discretionary business needs. Commonly a business may use these funds to cover wages, expand their business premises, cover cash expenses during periods of slow cash flow or purchase new equipment or machinery. The funds will then be repaired to the lender over an agreed-upon period of time with interest accruing. An important part of the process of commercial loan research is calculating the payments, to make sure a business can fully repay the loan easily.
A loan will be broken up into two parts;
- The principal or the loan amount. This is the total loaned amount, i.e borrowing a $300,000 loan. This will be $300,000.
- The interest amount. The interest rate will be applied on top of the loan amount, so for example you will pay a percentage of $300,000. Let’s consider 12% over 24 months;
| Principle of Loan | $300,000 |
| Interest Rate | 12% |
| Total Interest | $73,907.73 |
| Total | $373,907.73 |
| Monthly Repayments | $15,579.49 |
Types of Commercial loans
When applying for a commercial loan, there are several loan types and structures available to the borrower. The type of loan they choose to acquire will depend on the needs of the business and the reason for acquiring the loan. Let’s explore the list of some of the common types of commercial loans and how to calculate their payments;
Secured Business Loan:
Asecured business loan is when the borrower offers some sort of collateral when applying for the loan. In many cases, this can be a property, vehicle, or expensive piece of machinery. Offering an asset as a guarantee to the loan can improve the loan application success however because an asset’s value will need to be assessed the application process can sometimes take longer. Take the time to calculate the commercial loan and payment schedule to repay the loan. A secured loan can be a good option for businesses trying to get their hands on a larger sum of money, say over $500,000, or if they have a fractured credit history.
Unsecured Business Loan:
An unsecured loan can sometimes be the best option for a fast cash injection. Here, a business does not need a current asset to use as collateral when acquiring the loan. This process can allow some lenders to provide you with the credit within 24 hours or even on the same day. The trade-off is that the borrower will be slapped with a higher rate of interest due to the increased risk to the lender and the borrowing capacity will be more limited.
Business Line of Credit:
A business line of credit operates in a similar fashion to a credit card. Here, the lender provides the borrower with a credit limit, let’s say for example $30,000. The borrower can then access those funds as they choose and not be subject to interest repayments until a debit has been made. This is a great emergency option, you can calculate the commercial loan and payment schedule that would best suit you. If the borrower decides to use $5000 of funds, they will then begin to pay interest on that amount. Once the $5000 is repaid and the balance is back to its original amount, interest repayments will cease. The borrower can repeat this process for as long as the account remains open. A typical business line of credit remains open for 5-7 years.
Business Overdraft Account:
This is a great option as a buffer to your normal translation account. Here the borrower will be allowed to draw into a negative balance in their transaction account up to the agreed-upon limit. Interest repayments and possibly an account-keeping fee will be applied once the account goes into arrears. When the credit is repaid, the interest and account fees will stop. This can be a great option to link to an account that has several direct debits linked for utilities, rental payments, etc. That way funds are always available to maintain business operations.
3 Tips for commercial loan application success
When applying for a business loan there are several steps you can take to improve your application’s success. Below are a few of the handy tips you can apply to your application;
1. Prepare a business plan
Make sure you are able to show the lender how you intend to use the money and how it can profit the business. The lender will want to be comfortable knowing that you can repay the debt easily. Calculate your commercial loan repayments as you plan out the finances for the year.
2. Have your personal and financial documents ready
Compile your recent and relevant financial history including the last 2 years of tax returns showing net profits, liabilities, and current bank statements showing business cash flow. You will need to provide an active ABN, business particulars, and show you have been in business for more than 6 months.
3. Calculate all of your expenses
Make sure you choose the right loan that suits your needs best. Take the time to calculate your commercial loan payments to ensure you will be able to make them easily. Lumi has a very easy-to-use calculator so you can view the repayment amount that includes the interest component as well.
To find out more about the flexible funding options that Lumi provides small business owners, simply click here or call 1300 005 864 LUMI.
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